Interest rates – lower for longer

If you are one of those who have put a move on hold for fear of higher interest rates, then news yesterday from the Bank of England might provide some reassurance.

The latest inflation report (you can find it here) suggests that interest rates will only rise by a little over 1% in the next three years.

The inflation report – updated every three months by the Bank – estimates the expected rate of inflation in two years’ time if interest rates followed the path predicted by the City. The most recent calculations show that inflation is likely to reach the 2% CPI target some time around the end of next year and then stay there (see graph).

Inflation forecast by the Bank of England assuming interest rates follow the path expect by the City.

But that calculation is based on the assumption that interest rates follow market expectations. At the moment, the market is expecting that rates will reach just 1.7% by the end of 2017 – three years from now (see table). In other words, the Bank would comfortably meet its inflation target if it followed current market predictions which suggest a rise in rates of just 1.2% over the next three years.

How the City expects interest rates to change between now and 2017. Note that the Bank Rate is expected to be just 1.7% at the end of 2017 – three years from now. These are the rates on which the Bank of England bases its inflation forecasts. The figures for November at the latest forecast. The figures for August show what the city was expecting earlier this year.

Moreover, Bank Governor, Mark carney, has consistently said that the Bank will not raise rates until it can see that wages are rising. Data yesterday showing that wages are, at last, rising faster than inflation is welcome news, but has not persuaded the Bank that it will light a fire under inflation that would have to be doused by higher interest rates.

In short, interest rates are set to stay exceptionally low for a good while longer and will only start to rise when it becomes clear that rising incomes are having an effect on inflation. By that time, of course, bigger pay packets should allow borrowers to manage the increase in mortgage costs implied by higher interest rates.

If the fear of higher mortgage costs is all that is holding you back – you might find that now is a better time to buy than you had imagined.